#5: Relationship Between Tax Rates and Productivity

The Myth & Misconception: Periods in U.S. history during which high-income individuals were taxed at relatively low tax rates are marked by higher rates of economic productivity than are periods when the top tax rates on individuals were relatively high.

Wrong! There is no historical evidence that any such pattern occurs. In fact, as you will see from the graph below, quite the opposite is often true: Periods when top tax rates have been very high have experienced high levels of productivity, and periods when top tax rates have been much lower have experienced lower levels of productivity.

Top average tax rate 91% 71%  50% 35% 39% 35% 35%
Average annual productivity growth rate 3% 2.3% 1.9% 1% 2.2% 2.5% 1.8%

Productivity as used here refers to the amount produced by the private workforce for each hour worked. When productivity increases, more items are manufactured per hour than were manufactured before; and this will contribute to increased business profits and increased rates of economic growth.

What do these figures mean? No one really believes that very high marginal tax rates yield greater productivity. Instead, individual income tax rates are but one of many complicated factors—tax and non-tax— that bear upon productivity. Yes, you can associate periods of high productivity with periods of low tax rates but also with periods of high tax rates.

The lesson: Beware of statements that cutting taxes will guarantee stronger, long-term economic growth.

For statistics, see Slemrod, Joel B.and Jon Bakija, Taxing Ourselves, 4th ed. Cambridge: MIT, 2008, 116; and Faruqui, Umar, Wulong Gu, Mustapha Kaci, Mireille Laroche, and Jean-Pierre Maynard, “Differences in productivity growth: Canadian-U.S. business sectors, 1987-2000,” Monthly Labor Review, April 2003; “Labor Productivity and Costs: Productivity change in the nonfarm business sector, 1947 – 2011, Bureau of Labor Statistics, www.bls.gov/lpc/prodybar.htm.

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